Selling your business: exit strategy is everything

You get out what you put in when selling a business, so it pays to plan ahead – especially when it comes to your exit strategy

It’s never too soon to start planning your exit strategy. Even before you open your business for trading, many experienced entrepreneurs will tell you that you need to have a plan as to how and when you will cash in and move on.

“Although it may seem odd to pre-empt the end – and plan your departure as soon as you start – the ideal addendum to any good business plan should be a solid exit strategy,” says Melanie Luff from businessesforsale.com.

Having your exit mapped is all part of a good business plan, according to Business Gateway, a publicly funded organisation that offers advice to small businesses in Scotland. It says a well thought-out exit strategy can help you to maximise the value you get and successfully market your business to potential buyers or investors.

Anyone who has started their own business will have an emotional bond that will never be felt by incoming investors. So when it comes to parting company with your business, you need to ensure it is well-equipped to survive without you.

Mike Herd is executive director of the Sussex Innovation Centre, a Brighton-based business incubator helping high-growth tech businesses prepare for a sale.

He says: “The skill comes in knowing when [to sell]. If you hang on too long it may actually damage the business and reduce its value.”

Mr Herd’s Sussex University-owned centre works with companies as they look to move up a gear. The advice isn’t always to the owner’s liking, and the person who had the idea and founded the firm can often be the wrong one to continue its growth.

“The ambition of the idea may be greater than the ambition of the founder,” Mr Herd says, pointing out that it’s a tough decision to hand over the keys, even if you know a new owner can turn your small venture into a thriving company.

A founder preparing for a sale needs to make their business as attractive as possible, for example, by selling well before patents expire, says Mr Herd. “Patents are often where the true value lies, but they do have defined time spans.”

You have to be clear and honest about why it is you are selling. Buyers will need to know – and they will find out. It’s best to be upfront

After all, few sensible buyers will take on any venture that is counting down to its own demise.

Owners also have to be realistic about when they will get the money. “It’s typical for the selling founder to have a two- or three-year earn-out clause,” says Mr Herd. So, they will have to remain working at the company to ensure the profit and growth forecasts are met. If they are not, then the agreed sale price drops.

“However,” says Daniel Domberger, a partner at mergers and acquisitions specialist Livingstone, “if you are selling to retire, the last thing you want is to be locked into working there after the sale.”

Preparation is key, he added, and the detailed planning needs to start early. “Give yourself a year,” he says, “at the very least, three months.” That’s true whether it’s a £200m turnover company or £2m one.

Seek the services of a good adviser. Mr Domberger says: “You have to get the information ready. Make sure suppliers and contractors will remain with the new owner, as some have clauses that allow a supplier to stop if ownership changes. That will reduce the value of your business.”

Out and about: having your exit mapped is all part of a good business plan Credit:
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And run the sale of your business as well as the business itself. “You have to be clear and honest about why it is you are selling,” says agent Sean Mallon, who over the past decade has helped thousands of business owners buy and sell.

“If it’s because the business is failing, or you want to retire, or focus on another concern, then say so. Buyers will need to know – and they will find out. It’s best to be upfront,” he adds.